Warm-Up, 10/24
Marginal cost always intersects average variable cost
at
A. The profit-maximizing quantity
B. The minimum of marginal cost
C. The maximum of average variable cost
D. The minimum of average variable cost
E. The maximum of marginal cost
The Costs of
Production
(21)
Day 3
Go over homework
Alas, tomorrow I must draw out the lesson… Like an ol’OT
Extra Credit—up to a 2.32%
increase in your average
Have a story to present tomorrow which includes the
following:
1. 15 terms spread among all the chapters we have
covered
2. A minimum of 600 words
3. An Aristotelian or Magical Realist Plot
4. At least three standing ovations from the class
following uproarious laughter
Alas, tomorrow I must draw out the lesson… Like an ol’OT
Questions to answer today?!
1. What are all the measures of cost
relevant to a firm?
2. What are the differences between short
run and long run?
3. Economies of scale—what IS that?
Relationship Between Marginal Cost and
Average Total Cost
Whenever marginal cost is less than
average total cost, average total cost
is falling.
Whenever marginal cost is greater
than average total cost, average total
cost is rising.
Relationship Between Marginal Cost and
Average Total Cost
The marginal-cost curve crosses
the average-total-cost curve at
the efficient scale.
Efficient scale is
the quantity
that minimizes average total cost.
Relationship Between Marginal Cost and
Average Total Cost
$3.50
$3.00
$2.50
MC
Costs
$2.00
ATC
$1.50
$1.00
$0.50
$0.00
0
2
4
6
Quantity of Output
(glasses of lemonade per hour)
8
10
12
The Various Measures of Cost
It is now time to examine the
relationships that exist between the
different measures of cost.
The Various Measures of Cost Big Bob’s Bagel
Bin
Quantity
of Bagels
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Total
Cost
$2.00
$3.00
$3.80
$4.40
$4.80
$5.20
$5.80
$6.60
$7.60
$8.80
$10.20
$11.80
$13.60
$15.60
$17.80
Fixed
Cost
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
Average Average Average
Variable
Fixed
Variable
Total
Marginal
Cost
Cost
Cost
Cost
Cost
$0.00
$1.00
$2.00
$1.00
$3.00
$1.00
$1.80
$1.00
$0.90
$1.90
$0.80
$2.40
$0.67
$0.80
$1.47
$0.60
$2.80
$0.50
$0.70
$1.20
$0.40
$3.20
$0.40
$0.64
$1.04
$0.40
$3.80
$0.33
$0.63
$0.97
$0.60
$4.60
$0.29
$0.66
$0.94
$0.80
$5.60
$0.25
$0.70
$0.95
$1.00
$6.80
$0.22
$0.76
$0.98
$1.20
$8.20
$0.20
$0.82
$1.02
$1.40
$9.80
$0.18
$0.89
$1.07
$1.60
$11.60
$0.17
$0.97
$1.13
$1.80
$13.60
$0.15
$1.05
$1.20
$2.00
$15.80
$0.14
$1.13
$1.27
$2.20
Big Bob’s Cost Curves...
$20.00
$18.00
Total Cost Curve
$16.00
Total Cost
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
0
2
4
6
8
Quantity of Output
(bagels per hour)
10
12
14
16
Big Bob’s Cost Curves...
3.5
3
2.5
MC
Costs
2
1.5
ATC
AVC
1
0.5
AFC
0
0
2
4
6
8
Quantity of Output
10
12
14
16
Three Important Properties of Cost Curves
Marginal cost eventually rises with
the quantity of output.
The average-total-cost curve is Ushaped.
The marginal-cost curve crosses the
average-total-cost curve at the
minimum of average total cost.
Costs in the Long Run
For many firms, the division of total costs
between fixed and variable costs depends
on the time horizon being considered.
 In
the short run some costs are fixed.
 In the long run fixed costs become variable
costs.
Consequences of the Long Run
In the long run, firms can go out of
business or change their scale…
They will choose the scale that maximizes
their profits
Costs in the Long Run
Because many costs are fixed in
the short run but variable in the
long run, a firm’s long-run cost
curves differ from its short-run
cost curves.
Average Total Cost in the Short and Long Runs...
Average
Total
Cost
ATC in short
run with
small factory
ATC in short
run with
medium factory
ATC in short
run with
large factory
ATC in long run
0
Quantity of
Cars per Day
Economies and Diseconomies of Scale
Economies of scale occur when long-run
average total cost declines as output
increases.
Diseconomies of scale occur when longrun average total cost rises as output
increases.
Constant returns to scale occur when
long-run average total cost does not vary
as output increases.
Economies and Diseconomies of Scale
Average
Total
Cost
ATC in long run
Economies
of scale
0
Constant Returns
to scale
Diseconomies
of scale
Quantity of
Cars per Day